ACTG 3120 Lecture Notes - Lecture 6: Finance Lease, Operating Lease, Leaseback
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Kola Corporation (“Kola”) leases quality weapons to customers. She gains a loyal following of customers because quality is of limited supply but high demand due to its usefulness for the upcoming winter. Further, Kola tends to offer more favorable financing terms than competitors offering substitutive products (e.g., Walnut, LLC).
Kola was recently approached by the Noodle, Inc. (Noodle) which is interested in leasing a substantial stock of weapons over a potentially lengthy period of time. Noodle has indicated a willingness to pay any rate that Kola Corporation demands for its quality products, but generally receives an interest rate of 12% on all other borrowing transactions. Noodle’s management are a very noble group, so payments are reasonably assured. Further, there are no material cost uncertainties.
Kola has gathered its council to discuss entering into such a contract with Noodle and has invited you to provide financial council. Kola’s board has proposed several alternative sets of lease terms (below) and would like you determine what Noodle’s annual payments will be under each scenario, if payments are made at the beginning of the period.
| A | B | C | D | |
| Fair value of weapons to be leased | $365,760 | $365,760 | $365,760 | $365,760 |
| Book value of weapons to be leased | $365,760 | $290,760 | $365,760 | $365,760 |
| Desired Profit on Lease Initiation | $0 | $75,000 | $0 | $0 |
| Lease Term | 11 years | 11 years | 6 years | 6 years |
| Useful Life of leased assets | 13 years | 13 years | 6 years | 6 years |
| Desired rate of return | 10% | 10% | 10% | 13.225% |
| Residual Value (guaranteed) | $24,350 | $24,350 | $25,000 | $75,000 |
REQUIRED:
Prepare a schedule for Kola which uses Excel to compute Noodle’s necessary annual payment under each of the scenarios listed in the chart above. The schedule should list for each scenario above the desired present value of lease payments, future value of the leased asset, the lease term, and the interest rate and utilize an Excel formula to compute a payment. Kola is a high paying client of your firm, so the schedule should be extremely organized and professional looking (e,g., include a title, date, description in the top left-hand corner and utilize borders, font effects, etc. in cells to make the worksheet look visually appealing).
(Note: You must use only Excel to prepare and present all parts of this table. Do not use a hand-held calculator, and do not use the compound interest tables to solve any part of this problem. Points will be deducted if Excel formulas are not used for each necessary computation.)
Prepare a worksheet that determines the type of lease for each party to the transaction. The purpose of this worksheet is to automate the determination of lease type. This worksheet should show:
The particulars for each lease scenario.
List each capital lease requirement and indicate whether or not it is met
Use Excel formulas where meeting a particular criteria requires a calculation or is contingent on one of the lease criteria (e.g., “if” statements). The only items that should be hard-keyed in here are the particulars for the lease scenario and the answers to the first two capital lease criteria (ownership transfer, and bargain purchase option) for the lessee/lessor and the answers to the two lessor-only capital lease criteria.
For the requirements below, assume Kola Corporation chooses lease option A and enters into an agreement with Noodle on 1/1/18. Noodle should return the weapons on 12/31/2028.
Prepare a lease amortization schedule describing the pattern of payments and interest over the lease term for both Kola and Noodle.
(Note: You must use only Excel to prepare and present all parts of this table. Do not use a hand-held calculator, and do not use the compound interest tables to solve any part of this problem.)
Prepare the appropriate entries for both Kola and Noodle on 1/1/18. Numbers in journal entries should be linked to the table prepared in number 3 above or computed using Excel formulas.
Prepare the appropriate entries for both Kola and Noodle through 1/1/21. Numbers in journal entries should be linked to the table prepared in number 3 above or computed using Excel formulas.
Prepare the appropriate entries for both Kola and Noodle on 12/31/2028. Assume the weapons returned to Kola have a residual value of $500.
